Nomura sees 0.25% rate cut in April

With inflation remaining under its 6 percent target and oil prices falling, the Reserve Bank is likely to go for a final interest rate cut of 25 basis points in April, financial services major Nomura said. "Despite the uptick in the latest CPI print, inflation is well below the RBI's 6 percent target (January 2016), core CPI inflation is steady around 5 percent, oil prices have fallen sharply (-35 percent y-o-y) and exports are contracting in double digits. "Therefore, in our base case, we expect the RBI to deliver a final 25 basis points rate cut in its post-budget policy meeting in April 2016," according to the latest Nomura RBI Policy Signal Index (NRPSI).

The next RBI policy will be announced on February 2. The January 2016 reading for NRPSI is -0.24, which implies that the probability of a rate cut is 24 percent higher than the probability of a rate hike. "This signals a reasonably high likelihood of further easing and is consistent with the RBI's current accommodative monetary policy stance," it said.

Retail inflation measured by the consumer price index (CPI) quickened to 5.61 percent in December from 5.41 percent in November 2015 and 4.28 percent in December 2014. Nomura said beyond the 25 basis points rate cut in April, the RBI will remain on hold until end of 2016. "Given inflation expectations have yet to fall materially, a gradual narrowing of the output gap and the upside risks to the RBI's medium-term inflation target of 4 percent (March 2018), we see the terminal repo rate at 6.5 percent," it added.